Republic of Korea 85

Republic of Korea

Yield Movements Figure 1: The Republic of Korea’s Benchmark Yield Curve—Local Currency Government Bonds Local currency (LCY) government bond yields in the Republic of Korea climbed for all tenors between Yield () . 31 October and 18 November, shifting the entire yield curve upward (Figure 1). Bond yields for maturities of . 2 years and less shed an average of 17 basis points (bps), while yields from the 3-year through 30-year tenors . climbed an average of 42 bps. As yields rose faster at . the longer end than at the shorter end of the curve, the spread between the 2-year and 10-year tenors widened . from 22 bps on 31 October to 45 bps on 18 November. Time to maturity (years) Bond yields rose in October on increased expectations -Nov- -Oct- of a United States (US) Federal Reserve rate hike in Source: Based on data from Bloomberg LP. December following the release of stronger US economic growth in the third quarter (Q3) of 2016. Yields continued to rise in November amid uncertainty over the economic In its October economic outlook, the Bank of Korea policies of the new US administration. forecast real GDP to grow 2.5% y-o-y in the second half of 2016 and 2.7% in full-year 2016. It also projected On 11 November, the Monetary Policy Board of the consumer price inflation to level off at 1.1% y-o-y in the Bank of Korea decided to maintain the base rate at 1.25% second half of 2016 and average 1.0% in full-year 2016. as it has done with its past four monetary policy decisions. The central bank expects that both the domestic and Size and Composition global economies will maintain modest growth. However, the board also noted that risks have increased and The Republic of Korea’s LCY bond market expanded therefore it will continue to monitor the domestic and 0.6% q-o-q and 3.9% y-o-y in Q3 2016 to reach global environments. KRW2,076.6 trillion (USD1,886 billion) at the end of September. The expansion was buoyed by growth in both Consumer price inflation in the Republic of Korea the government and corporate bond markets (Table 1). remained moderate, climbing to 1.3% year-on-year The outstanding amount of government bonds grew (y-o-y) in October from 1.2% y-o-y in September. On a 0.3% q-o-q and 5.2% y-o-y to KRW855.8 trillion on the month-on-month basis, consumer prices inched up 0.1% back of relatively strong growth in central government in October after increasing 0.6% in September. bonds, led by Korea Treasury Bonds. Government bond issuance was valued at KRW76.9 trillion in Q3 2016, Real gross domestic product (GDP) growth in the down 11.6% q-o-q and 8.6% y-o-y on lower quarterly Republic of Korea moderated to 2.7% y-o-y in Q3 2016, bond sales for both the central bank and the central according to advance estimates from the Bank of Korea, government. down from 3.3% y-o-y in the second quarter of 2016. Slower GDP growth in Q3 2016 resulted from declining In the LCY corporate bond market, outstanding y-o-y growth in private consumption and weaker y-o-y bonds grew 0.8% q-o-q and 3.0% y-o-y to reach growth in construction, manufacturing, and services; as KRW1,220.8 trillion at the end of September, fueled by well as y-o-y contractions in agriculture, forestry, and relatively fast growth in financial debentures. Issuance fishing production. On a quarter-on-quarter (q-o-q) of LCY corporate bonds were down 9.8% q-o-q and basis, real GDP growth stood at 0.7% in Q3 2016. 18.9% y-o-y to KRW81.5 trillion in Q3 2016. 86 Asia Bond Monitor

Table 1: Size and Composition of the Local Currency Bond Market in the Republic of Korea

Outstanding Amount (billion) Growth Rate (%) Q3 2015 Q2 2016 Q3 2016 Q3 2015 Q3 2016 KRW USD KRW USD KRW USD q-o-q y-o-y q-o-q y-o-y Total 1,999,322 1,687 2,064,024 1,792 2,076,602 1,886 2.1 10.5 0.6 3.9 Government 813,604 686 853,009 741 855,763 777 1.0 14.3 0.3 5.2 Central Bank Bonds 186,350 157 181,420 158 179,680 163 (1.0) 3.2 (1.0) (3.6) Central Government Bonds 536,884 453 583,402 507 585,836 532 1.8 10.0 0.4 9.1 Industrial Finance Debentures 90,370 76 88,188 77 90,247 82 0.7 110.3 2.3 (0.1) Corporate 1,185,718 1,000 1,211,015 1,051 1,220,839 1,109 2.9 7.9 0.8 3.0

( ) = negative, KRW = Korean won, q-o-q = quarter-on-quarter, Q2 = second quarter, Q3 = third quarter, USD = United States dollar, y-o-y = year-on-year. Notes: 1. Calculated using data from national sources. 2. Bloomberg LP end-of-period local currency–USD rates are used. 3. Growth rates are calculated from local currency base and do not include currency effects. 4. Central government bonds include Korea Treasury bonds, National Housing bonds, and Seoul Metro bonds. Sources: EDAILY BondWeb and the Bank of Korea.

The outstanding LCY bonds of the top 30 corporate holdings of households and nonprofit organizations at issuers at the end of September amounted to 1.5 percentage points. KRW775.1 trillion, or the equivalent of 63.5% of total LCY corporate bonds outstanding. Korea Housing Finance Foreign investors sold a net KRW992 billion of the Corporation remained the largest corporate bond issuer Republic of Korea’s LCY bonds in Q3 2016, down from (Table 2). Most of the notable LCY corporate bond issues KRW1,229 billion in Q2 2016 and KRW4,149 billion in in Q3 2016 were made by domestic financial institutions the first quarter of 2016. On a monthly basis, foreign such as Industrial Bank of Korea, Korea Eximbank, and investors’ net bond sales amounted to KRW663 billion Mirae Asset Securities (Table 3). in September, down from KRW917 billion in August (Figure 4). Investor Profile Policy, Institutional, The largest investor group in the LCY government bond and Regulatory Developments market at the end of June were insurance companies and pension funds, which held 31.7% of the market’s total Financial Services Commission Announces outstanding stock of LCY government bonds at the end Law on Corporate Governance for Financial of June (Figure 2). The next-largest investor group were Companies other financial institutions, accounting for a 20.5% share of the total stock. Other major investor groups include The Financial Services Commission announced in general government and banks with shares of 19.3% and August the State Council’s approval on 26 July of 13.4%, respectively. the Enforcement Decree of the Act on Corporate Governance of Financial Companies as well as the Insurance companies and pension funds were also the effectivity of the decree on 1 August. The decree aims largest investor group in the LCY corporate bond market, to promote the sound and transparent corporate with their holdings accounting for 37.7% of the total governance of financial companies. Among its key market at the end of June (Figure 3). In the 12 months provisions are disqualification criteria for directors through the end of June, insurance companies and and officers, recommended composition of the board of pension funds registered the biggest increase in a holdings directors, a fit-and-proper rule for the largest shareholder, share at 2.2 percentage points. The largest drop was in the and performance-based pay for officers and employees. Republic of Korea 87

Table 2: Top 30 Issuers of Local Currency Corporate Bonds in the Republic of Korea

Outstanding Amount State- Listed on Issuers Type of Industry LCY Bonds LCY Bonds Owned (KRW billion) (USD billion) KOSPI KOSDAQ 1. Korea Housing Finance Corporation 97,834 88.8 Yes No No Housing Finance 2. NH Investment & Securities 60,743 55.2 Yes Yes No Securities 3. Mirae Asset Daewoo Securities 55,611 50.5 No Yes No Securities 4. Korea Investment and Securities 49,345 44.8 No No No Securities 5. Korea Land & Housing Corporation 49,049 44.5 Yes No No Real Estate 6. Mirae Asset Securities 40,653 36.9 No Yes No Securities 7. Industrial Bank of Korea 39,831 36.2 Yes Yes No Banking 8. Hana Financial Investment 35,411 32.2 No No No Securities 9. Korea Deposit Insurance Corporation 29,450 26.7 Yes No No Insurance 10. Hyundai Securities 24,272 22.0 No No No Securities Electricity, Energy, 11. Korea Electric Power Corporation 23,410 21.3 Yes Yes No and Power Transport 12. Korea Expressway 22,320 20.3 Yes No No Infrastructure 13. Shinhan Bank 20,391 18.5 No No No Banking Transport 14. Korea Rail Network Authority 18,470 16.8 Yes No No Infrastructure 15. Samsung Securities 18,288 16.6 No Yes No Securities 16. Kookmin Bank 17,963 16.3 No No No Banking 17. Woori Bank 17,495 15.9 Yes Yes No Banking 18. Daishin Securities 16,706 15.2 No Yes No Securities 19. NongHyup Bank 15,070 13.7 Yes No No Banking 20. Korea Gas Corporation 14,919 13.5 Yes Yes No Gas Utility 21. Small & medium Business Corporation 12,990 11.8 Yes No No SME Development 22. Korea Eximbank 12,120 11.0 Yes No No Banking 23. Korea Student Aid Foundation 11,340 10.3 Yes No No Student Loan 24. Standard Chartered First Bank Korea 11,190 10.2 No No No Banking 25. Shinhan Card 10,789 9.8 No No No Credit Card 26. Hyundai Capital Services 10,489 9.5 No No No Consumer Finance 27. Korea Water Resources Corporation 10,481 9.5 Yes No No Water 28. Shinyoung Securities 9,618 8.7 No Yes No Securities Transport 29. Korea Railroad Corporation 9,550 8.7 Yes No No Infrastructure 30. NongHyup 9,340 8.5 Yes No No Diversified Total Top 30 LCY Corporate Issuers 775,138.7 703.9

Total LCY Corporate Bonds 1,220,839.0 1,108.7

Top 30 as % of Total LCY Corporate Bonds 63.5% 63.5%

KOSDAQ = Korean Securities Dealers Automated Quotations, KOSPI = Korea Composite Stock Price Index, KRW = Korean won, LCY = local currency, USD = United States dollar. Notes: 1. Data as of end-September 2016. 2. State-owned firms are defined as those in which the government has more than a 50% ownership stake. Sources: AsianBondsOnline calculations based on Bloomberg LP and EDAILY BondWeb data. 88 Asia Bond Monitor

Table 3: Notable Local Currency Corporate Bond Issuance in Q3 2016 Figure 4: Net Foreign Investment in Local Currency Bonds in the Republic of Korea Coupon Rate Issued Amount Corporate Issuers (%) (KRW billion) KRW billion Industrial Bank of Korea , 0.5-year bond 1.36 320 , 0.6-year bond 1.36 410 , 2-year bond 1.45 300 , 3-year bond 1.32 300 Perpetual bond 3.16 290 –, Korea Eximbank –, 1-year bond 1.40 310 –, Mirae Asset Securities – , 5.5-year bond 3.50 300 –, KRW = Korean won, Q3 = third quarter.

Jul-

Jan-

Sep-

Note: Coupon rates for 0.5- and 0.6-year bonds of Industrial Bank of Korea and 1-year Sep-

Sep-

Mar-

Aug-

Mar-

Nov-

May-

Nov- May- bond of Korea Eximbank are indicative yields at end-September 2016. May- Source: Based on data from Bloomberg LP. KRW = Korean won. Source: Financial Supervisory Service.

Figure 2: Local Currency Government Bonds Investor Profile June June

Households Rest of the World Households Rest of the World and Nonproﬁt . and Nonproﬁt . Organizations Banks Organizations Banks . . . .

Nonﬁnancial Nonﬁnancial Corporations Corporations . Insurance . Insurance Companies Companies and Pension and Pension General Funds General Funds Government . Government . . .

Other Financial Other Financial Institutions Institutions . .

Sources: AsianBondsOnline and the Bank of Korea.

Figure 3: Local Currency Corporate Bonds Investor Profile

June June Households and Rest of the World Households and Rest of the World Nonprofit Organizations . Nonprofit Organizations . . . Banks Banks . . Nonfinancial Nonfinancial Corporations Corporations . .

General General Government Government . . Insurance Insurance Companies Companies and Pension and Pension Other Financial Other Financial Funds Funds Institutions Institutions . . . .

Sources: AsianBondsOnline and the Bank of Korea.